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Private markets fundraising was higher last year than before the pandemic, while the industry saw a 57% fundraising increase worldwide in “opportunistic closed-end real estate,” McKinsey & Company said in a report released Thursday.

Worldwide, private markets fundraising was $1.184 trillion in 2021, up by nearly 20% from $990 billion in 2020 and 1.6% from $1.166 trillion in 2019, according to the McKinsey Global Private Markets Review 2022. (All figures are in U.S. dollars.)

“Office and retail aren’t dead, though much work remains to reimagine working models and spaces for the post-pandemic experience,” McKinsey said in the March 24 report, titled “Private markets rally to new heights.”

McKinsey defines private markets as closed-end funds investing in private equity, real estate, private debt, infrastructure or natural resources, as well as related secondaries and funds of funds.

Total assets under management across private markets reached $9.8 trillion as of June 30, 2021, up from $7.4 trillion a year earlier, McKinsey said.

In the global closed-end real estate sector, fundraising was $176 billion in 2021, up by 18% from $149 billion in 2020 but down by 11.6% from $199 billion in 2019.

Within closed-end real estate, fundraising in the “value add” category was $54 billion in 2021, up by 12.5% from $48 billion in 2020. Fundraising in the “opportunistic” real estate category was $62 billion in 2021, up by 57% from $39 billion in 2020.

“Investors shifted allocations from core and core-plus vehicles — the traditional homes of fully leased class A properties — to opportunistic vehicles, many of which seek to buy underperforming assets,” the report said. “However, while it is difficult to find evidence of a flight to quality among investment dollars to date, high-quality spaces and experiences are even more important to tenants today (such as helping office occupiers compete for talent).”

In North America, “investors rotated capital toward higher-risk strategies, perhaps hoping to take advantage of dislocation and distress that did not materialize at the scale that many market participants anticipated in the early days of the pandemic,” McKinsey added. “Private real estate rebounded after a sharp decline in fundraising, deal making and valuations in 2020.”

Meanwhile, investors need to take into account what McKinsey calls “sustainability-related risk.” In real estate, there is increasing concern that climate change introduces significant risk.

“In downtown Calgary, for example, the combination of oil price volatility and market access issues (driven by climate-change-related opposition to pipelines) has contributed to vacancy rates of about 30% as of January 2021,” the report said.

Climate-change risk includes direct risks that affect a building and indirect risks that affects the market in which a building exists.

“Direct physical consequences can be conspicuous: for example, the value of homes in Florida exposed to climate risks are depressed by roughly $5 billion relative to unexposed homes,” the report said.

Private-equity deal activity for ESG-related investments has grown at 16% per year since 2016, according to the report. And fund vehicles with an explicit ESG mandate — also known as impact funds — have doubled in the last five years, McKinsey said, noting that investors have focused more on environmental and social dimensions lately.